Tuesday, 12 October 2010

Tricks of the trade

One of my favourite, non-moralist based, parables against protectionism or mecantilism comes via Brad de Long (I can no, longer find the link).

In a fictional country that exported grain and imported cars, a protectionist movement developed that demanded imports of cars stop in favour of domestically produced cars.

As this movement built political momentum (”protect the jobs”, "buy local") a billionaire announced that he had discovered a technology that would allow for the transformation of grain, of which the country produced plenty, into cars, which the country at present imported. On the back of a substantial government grant (!), the billionaire built a sprawling site on the coast, protected by massive security. He employed a workforce that was sworn to secrecy and then began buying up large amounts of the locally produced grain.

The grain was shipped into the secretive site in trainloads and amazingly cars were shipped out to be sold to customers. The billionaire was a national hero, lauded by politicians for single handedly ending the need to import cars. No longer were imports needed. In addition, he was also a big buyer from domestic farmers (buying "local"). And of course he employed people and made huge profits which provided corporate tax revenues.

The country was universally in awe of this national miracle of economics, except for one curious journalist who managed to infiltrate the secretive site, into which the grain went and cars emerged.

This journalist discovered that the site, hidden from outside eyes, consisted of little more than a massive rail freight and dock facility. The grain was being transferred from the incoming trains on to bulk transports sailing off to foreign countries. At a different point, car transports were arriving, unloading their cargo onto trains heading off to be sold across the country.

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